Committing to a balanced and resilient economy

Andrew Jeffries, country director for Vietnam at the Asian Development Bank

The government has given some assistance to enterprises and individuals. What are the main issues and solutions to improve the efficiency of future support packages?

The government has responded swiftly to the economic impacts, supported by strong fundamentals, and has been instrumental in ensuring the economy’s resilience. The accommodative monetary policy through key interest rate cuts together with the implementation of credit package and fiscal support measures have provided breathing space to affected businesses, including small- and medium-sized enterprises.

However, credit support has been mainly arranged and provided by commercial banks. The bulk of the increases in liabilities have been shouldered by the commercial banks, but they still have to apply required lending standards, especially when the balance sheets of affected firms are being deteriorated. Without risk-sharing by the government, banks may have been reluctant to provide more loans to affected firms.

There has not been sufficient financial support from the government. The support was mainly in the form of deferral of taxes and land rental, and the size of the support remained modest as compared with other countries (with fiscal support of up to 3 per cent of GDP in the Philippines, 6 per cent in Malaysia, and 10 per cent in Thailand). For some businesses that were heavily affected by COVID-19 with revenue deterioration and no profit, deferral of VAT and corporate income tax have less impact than the tax cuts.

The State Bank of Vietnam has instructed banks to extend the implementation of credit support measures to the end of 2021. The government also allowed the extension of the deferral of taxes and land rental in 2021 to further reduce the shock’s impact and support economic recovery.

The emerging long-term economic priorities after COVID-19 are the imperatives to building an economy that is resilient to internal and external shocks which have become more frequent in recent decades; which is broad-based to help reduce disruptive impacts from external crisis; and which is digitally able to strengthen economic competitiveness and efficiency.

Greater flexibility is important to ensure speedy and timely transfers to the most needed groups. Such cash transfers don’t just support the people who are direct recipients, but the small business they buy their basic goods and services from.

To accomplish this, databases of different ministries can be shared to support a more efficient identification of beneficiaries, and to address critical gaps in delivery systems and targeting mechanisms. Many areas of government can benefit from accessing these databases to be used for other means, such as identifying recipients and delivering cash transfer programmes.

What are your recommendations for the short term?

Firstly, Vietnam should continue the ongoing commendable efforts to procure vaccines and expedite vaccinations. The higher the vaccination rate, the stronger and faster the economic recovery. Next, government spending should rise for social security, especially ramping up direct support for the most vulnerable groups such as informal and unemployed workers. Vietnam’s social spending is modest compared to other countries in the region.

Accelerating the disbursement of public investment is also very important. There are suggestions for Vietnam to borrow domestically to raise sufficient capital for economic recovery. Additional resources would be needed. But what is more important is for Vietnam to fully disburse the public investment already allocated.

Finally, there is rising pressure on the banking system to lower interest rates to lend more. But rising non-performing loans, which are currently estimated at around 7 per cent of the total outstanding loans, could weigh on the economic recovery in the medium term.

However, affected businesses that have healthy cash flows but no collateral are not able to access loans. Within this context, an urgent and innovative financing vehicle could help fill this gap to support the firms but not put too much pressure on the banks.

What needs to be carried out for a longer-term economic recovery?

Vietnam needs to work towards a climate-friendly economy, including investments in integrated and intermodal transport and logistics to lower transport and logistics costs and increase Vietnam’s competitiveness, clean energy, transport, and climate-resilient urban and rural infrastructure.

Secondly, strengthening institutional efficiency is the key to unlocking the private sector’s potential to support growth. Accomplishing unfinished business reforms, improving the quality, transparency, and enforcement of laws and regulations, and simplifying business conditions are all critical.

In addition, the application of digital applications should take place in governance, businesses, and throughout the economy. Digitalisation is a worldwide trend and digital transformation is already a government priority, but the pandemic makes this even more urgent.

Finally, Vietnam needs to ensure social inclusiveness as well as social equity. The digital agenda, private sector development, and infrastructure can cluster in high growth urban areas, but it will take government commitments to ensure they also reach more remote and poor areas and in a uniform manner.